Saturday 5 March 2011 19.01 EST
First published on Saturday 5 March 2011 19.01 EST

The government is expected to announce a complete review of inheritance tax in the next budget, following recommendations by the Office of Tax Simplification. In its report, published last week, the OTS said: "On the basis of the low number of estates caught by IHT and the useful but relatively low revenues [after reliefs] that it raises, we consider that a more appropriate approach may be to review the whole of IHT rather than to consider individual IHT reliefs. Such a review may also encompass a review of capital gains tax and we envisage this as a longer term project."

Such a review is likely to result in an increase in tax revenue, according to Danny Cox, head of advice at the independent financial adviser Hargreaves Lansdown. "We're expecting the chancellor to say, 'Yes, I agree with my department', and announce a consultation period," Cox said. "Estimates from the OTS show that of the 560,000 deaths in 2009, just 12,000 estates paid inheritance tax. From this low base we might assume that the result of a review would not be in the investor's favour."

Although the inheritance tax threshold has been frozen at £325,000 since 2009, revenue from inherited estates fell dramatically in the last two years of the Labour government. This was partly as a result of house price falls but also because a move by the then chancellor, Alistair Darling, to allow married couples and civil partners to transfer unused inheritance tax allowance from a deceased spouse to the surviving one.

Cox speculates that the government may decide to reduce the threshold or alter the rules on making tax exempt gifts in an attempt to boost the sums generated when assets are passed on.

While in opposition the Conservatives said they had no intention of rescinding the married couple's ability to transfer unused tax exemptions, but recent U-turns on policy, including the bringing forward of rises in the state pension age, indicate anything could be up for grabs.

However, changes are not likely to be retrospective, Cox said, so people who want to protect their assets from tax should consider taking action now.

The cash rich can give IHT-exempt gifts worth up to £3,000 per tax year, and may carry forward any unused part of that allowance to the next tax year. Parents can give wedding or civil partnership cash or gifts worth up to £5,000, while grandparents and great grandparents can gift up to £2,500 each year. Anyone else can give cash or gifts worth £1,000. Gifts above these levels may also escape IHT, but only if the giftor survives for seven years from the date of making the gift.

Avoiding IHT is more problematic for those whose wealth is tied up in their home, particularly if they live in London or the south-east. Married and civil couples will be able to pass on properties worth up to £650,000 to their children, thanks to Darling, but single parents will be limited to the single £325,000 allowance, with any assets above that value being taxed at 40%.

Cox dislikes complicated tax avoidance schemes designed to enable people to give away their homes before their death. Instead, he recommends that those whose estates are likely to exceed the IHT threshold take out an insurance policy designed to last until they die, putting it in trust for the beneficiaries of their will. Although this will not protect the property itself from tax, it means the beneficiaries will have enough money to pay the tax bill. However, he warned: "It does depend on you having enough disposable income to pay for the insurance. If you are old, it can be very expensive."

The OTS initially intended to examine 1,042 different tax reliefs, but decided this would be an "impossible task" and cut 883 from its review. The chancellor is expected to respond in the budget on 23 March.

The OTS has also recommended further investigation into the alignment of or merging of National Insurance (NI) and income tax, and a review of the principal private residence relief, which enables people to realise tax-free capital gains from the sale of a property so long as they have lived in it with a degree of permanence.

It recommends the abolition of 44 reliefs, including:

■ Blind person's allowance. The OTS said the majority of blind people do not earn sufficient income to use the relief and there may be better ways to help people with a visual handicap.

■ Late-night taxis. Where an employer reimburses the cost of late-night taxis for non-business travel, the employee is currently not expected to pay tax on the benefit. The OTS said this rationale is reducing, as those who find themselves working late are increasingly doing so regularly and are therefore outside the relief.

■ NI exemption for rewards paid to employees of card issuers who help identify lost or stolen credit cards. The OTS argues that as the reward needs to be recorded for PAYE, it should be subject to NI.

■ Subscriptions paid by policemen to organisations that relate to superannuation, death benefits or funeral expenses through a life policy qualify for tax relief. The rationale is obsolete and so is the relief, the OTS said.

The OTS had been expected to recommend changes to the taxation of investment bonds, but instead it said that investors should still be able to withdraw 5% of the original investment each year, with tax deferred.

• This article was amended on 8 March 2011. In the original, it omitted the words "wedding or civil partnership" from the sentence: "Parents can give wedding or civil partnership cash or gifts worth up to £5,000". This has been corrected.